We’ve Been Looking At Trade All Wrong
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I'm gonna make him an offer, Captain. I'll trade you. Lesson number one. Don't underestimate the other guy's greed. Ha ha ha!

Lately, trade has been a huge topic of discussion, propelling it from a boardroom-on-the-hill-in-the-weeds issue to a hot-button front-page debate. We're launching a trade war and it's going to affect us. Suddenly, the American public is privy to everything, from tariffs. What started with Washington's tariff hikes on steel and aluminum?

is now a harbinger of a trade war that could... To supply shortages. ...could also intensify drug shortages and limit medical device makers... To international partnerships. And to be honest with you, Canada only works as a state. We don't need anything they have. In times like these, people look to academic institutions, government officials, and foreign policy organizations to know the norms and rules of the game.

and how to trade with countries around the world using the guidelines we created. But what if everything we thought we agreed on about trade is no longer effective? What if, in this new world, a consensus in Washington no longer exists?

This season on Why It Matters, we're going to do something different. We're going to dive into one topic, the role trade plays in the United States and abroad, and figure out why the old rules no longer apply. And in order to understand why our assumed norms and policies may be wrong today, we need to revisit the trade story of yesterday.

I'm Gabrielle Sierra. Today, in our first episode of the season, we're hopping in our time machine and heading back to learn how trade made the U.S. one of the most powerful nations in the world. Talking about trade can be confusing.

kind of boring. I'm really sorry. It's your focus. I know. But sell me on why neither of those are true and give me an explanation of the basics. You know, what is trade? Why does it matter? Yeah, actually, I love talking about trade and I love teaching trade because it tells you everything you want to know about the world.

This is Edward Alden. He's a senior fellow at the council, and he teaches international economic policy at Western Washington University. Ted is one of our experts that we'll be hearing from throughout the season. I mean, at the end of the day, what do we do as human beings? Primarily, we consume stuff, right? That's what keeps us alive at a minimum and ideally keeps us comfortable. And if we're really lucky, keeps us happy.

And that stuff is all coming from somewhere. And in the 21st century, it's coming from all over the world. So all of us live trade every single day. But I think we imagine that trade today is like it was 50 years ago or 100 years ago.

which is, you know, advanced products are made in the wealthier countries. We make computers, we make cars, and we sell those to other countries. And then we import raw materials. And every country specializes in what it's best at. And they trade. It's not the way the world works anymore. Stuff is made everywhere.

To make sense of all the things we'll be discussing this season, we're going to pop in with some key takeaways for you to keep in your back pocket as we go. Takeaway one. When it comes to the products we use every day, trade is everything. And everything is traded. Once upon a time, trade was mainly about making goods in one nation to sell to customers in another nation.

Since then, things have become more complicated. Emerging technologies reshaping the global supply chain have made production more fragmented, spanning across many countries to make one product. A camera lens from Japan, a display screen from South Korea, and a microchip from Taiwan all come together in China to create the phone you're probably listening to this episode on right now.

The other thing that makes it really interesting is it has a lot to do with whether the world is a prosperous and peaceful place. I mean, we don't maybe necessarily believe anymore that countries that trade with each other don't go to war with each other. Sometimes they do. We certainly saw that with Russia and Ukraine. But all things being equal, trade is the basic way in which countries get along. Even countries that we have trouble with, like China, we trade a lot with.

So it's also kind of at the foundation, I believe, of international politics as well and keeping the world peaceful. And that's something that we all have a huge interest in, whether we think about it every day or not. So trade is bigger than trade. Trade is way bigger than trade. Trade is also kind of an all-purpose tool that spills over into all these other areas of how we live and how nations get along. ♪

What is changing? What norms have been challenged or changed most in the last, let's say, decade to the last 100 years? Yeah, well, the United States since the end of the Second World War basically believed in two things: believed in stability and believed in gradually making trade freer and more open around the world. So we traded with more and more nations.

The world's largest consumer of coffee is the USA, which takes nearly three quarters of the world's supply. Merchant ships of the world transport raw sugar to refineries. The sugar industry hails the carbonated beverage business as one of its largest customers. To sustain our world and the security and relative prosperity with which all Americans live, we do not have enough and must import iron ore, tin, mica, carbonate.

And there was a fairly well-respected set of rules that pretty much every nation in the world abided by. Okay, you said pretty much abided by. So is this where we get the but? The world's not really doing it anymore. I mean, the United States much more explicitly under Trump in the first term, also under President Biden, and now really under Trump in the second term, is blowing that system up.

and saying, actually, we don't really care whether there's a stable rules-based system at all. We think we've been getting screwed by this set of rules for decades now. We're going to tear up the rule book and make our own, and the rest of the world's just going to have to adjust to that. That is a profound and destabilizing, we're only in the early stages of it, but a profound and destabilizing change. Takeaway two.

What we had at the middle of the 20th century was the most ambitious and successful effort to create an international set of rules for trade. And now, it's all changing. Post-World War II trade policy has been pretty much bipartisan in favor. But now, steered by the Republicans, has become something the two parties are more wary of. What's been the general consensus among American presidents when it comes to trade?

Yeah, well, you go all the way back to Franklin Roosevelt. That the only thing we have to fear is fear itself.

I mean, right up to Trump in 2016, presidents believed that opening trade around the world was good for U.S. companies, good for those of us who buy the stuff we need for our day-to-day lives, and really good for the U.S. position in the world. It was a big tool for making friends, cementing alliances, making the rest of the world more prosperous, which those presidents saw as in our interests. You know, there were glitches here and there, but there's a pretty stable consensus

that continuing to advance a freer, more rules-based system was absolutely at the core of American international interest. - Today, signing HR 11970, Trade Expansion Act of 1962, marks a decisive point for the future of our economy.

for our relations with our friends and allies, and for the prospects of free institutions and free societies everywhere. We have benefited for 60 years by leading the way to integrate the world's economies, and that will promote peace, it will promote freedom, it will promote stability. Nations in Asia and Latin America now contribute more to the world economy than ever before. And we agreed to keep our markets open and firmly reject protectionism. Free markets, free trade,

and free people. So to go a little further back, how did it all start? Was there a Mr. Trade? Who led this global trade initiative way back when? I mean, there was Cordell Hull, who was Franklin Roosevelt's Secretary of State. And it came out of a set of rules, which those of us who kind of grew up in this post-Second World War era, or in my case, the post-Vietnam War era, we all kind of believe this.

And the lesson was that what happened in the 1920s and 1930s was very bad. The United States had emerged after World War I based on the size of its economy, based on its military strength as a global power, but had decided to say, eh, we don't really want to have anything to do with the Europeans. They're a pain in our ass. We'd rather just deal with stuff at home. And so that became the era of what we talk about as isolationism. The United States put in place a series of high tariffs

which are the duties, the taxes that get charged on imports. I mean, everybody learns in high school about the smooth holly tariff, but in 1922, there was the Ford v. McCumber tariff, which was almost as severe as the smooth holly tariff. So the United States put taxes on imports. The rest of the world did the same. And then we saw the rise of fascism in Europe and the descent of the Second World War.

According to Ted, we all learned about the Smoot-Hawley tariff in high school. But if you're like me and have literally zero memory of it, maybe you'll remember this scene from Ferris Bueller's Day Off. In 1930, the Republican-controlled House of Representatives, in an effort to alleviate the effects of the—anyone? Anyone?—Great Depression, passed the—anyone? Anyone?—

Anyone? Anyone? Hope that jogged your memory.

So the people around Roosevelt, most notably Cordell Hull, but there were many others, came to look at that set of events and say, "This was really bad. We made some stupid mistakes." That when countries begin to, in effect, go to war with each other over trade, that's kind of what you're doing when you put tariffs in place. You're saying, "We want people to buy our products, not your products." Came to be known as what's called "beggar thy neighbor" strategies. So it affects your economic policies.

are hurting your neighbors. That came to be seen as a very bad thing, which contributed to the environment that led into the worst war that the human race has ever seen. And so there was a determination coming out of the war not to make that set of mistakes again and to build a different system that it was hoped would prevent the same sort of stupidity in the future that we had seen in the 1920s and 30s. I am very proud and the country is very proud

of the splendid way in which you led the American delegation to the World Economic Conference. I thank you most sincerely, Mr. President. I think that each of the important countries will soon be coming along hand in hand and elbow to elbow with our country in its tremendously constructive efforts

to restore our domestic economy to a practical and normal basis. Hmm. Okay, maybe this is a silly question. Two-parter, how much are we actually getting from other countries versus making here homegrown? And let's say we just said, we're going to shop local. We're not getting anything from anywhere else. Could we do that? I mean, yeah, if we're willing to pay a high enough price. Relatively speaking,

The United States is a more self-sufficient economy than most because we're a big, diverse country. What they call the trade to GDP ratio, so that's the size of trade, exports plus imports as a percentage of the economy, is about 25% in the United States.

Most countries, it's 70%, 80%, 90% above that. Canada, it's around 70%. Europe, it's high as well. So most countries are actually quite a bit more dependent on trade

Made in America.

When's the last time you saw that stamped on the back of your t-shirt or on the bottom of your favorite coffee mug? Don't get me wrong. Like Ted said, the U.S. still makes a lot of stuff.

And a few decades ago, domestic manufacturers were the backbone of the U.S. economy and provided jobs to millions of people around the country. But as companies sought to lower costs, manufacturing began to move overseas. In a backlash to increased globalization, "Made in America" became the slogan for patriotism, industrialization, and supporting domestic businesses. And while buying local is great for supporting your community,

What would it cost if the U.S. went back to trying to produce everything here at home again? Well, the retail price of an iPhone would jump from about $600 or $700 to over $2,000. Even American-made car dealers like Ford get parts from around the world. Shifting production and the manufacturing of parts entirely to the U.S. would increase the cost of their cars by thousands, if not tens of thousands of dollars.

That said, we also have the largest multinational companies in the world. Multinational means just that. It means they're sourcing products from all over the world. They've got factories all over the world. There's an awful lot of stuff that's absolutely critical to us that we don't make. We saw that in the early stages of COVID when the United States didn't have mass production. We had to import all our masks and other countries were hoarding those.

Or ventilators. We didn't have enough ventilators. We didn't make ventilators in the United States. We didn't make them at the scale that we needed to be able to make them to respond to the crisis. So, you know, if you were to try to go down that road, there would be massive, massive disruption. There'd be a whole bunch of companies that exist today that simply would not work. Takeaway three. Trade has a domino effect. Think about the supply chain issues the world faced during the COVID-19 pandemic.

safety precautions and mandates kept many workers in manufacturing and agriculture at home. This led to an increase in cost to transport fertilizer from nations like Russia and Canada to other countries. And very quickly, the world began feeling the impacts of a fertilizer shortage. This led to lower crop yields, higher food prices, and an increase in food insecurity around the world.

Global supply chains are susceptible to roadblocks that are difficult to recover from, especially when triggered by extreme events like a global pandemic. When it comes to disruptive trade policies like tariffs, the same thing can occur. Take the auto industry for example. I mean, Ford and General Motors in the Midwest are completely

completely integrated with their operations on the Canadian side of the border. Every vehicle they make is using parts that come from the other country. And often they're parts that go back and forth multiple times. You know, there's one, one, uh, you know, adaptation performed in Canada and the part comes to the United States and it's changed again, and then eventually assembled into a vehicle in Canada or vice versa in the United States. You bust that up by putting cariffs in place and the entire business model

of Ford and General Motors goes up in smoke. You know, if there were cars made in Canada and cars made in Mexico and cars made in the United States, and there were 25% tariffs on them, then you kind of have a rough idea how that's going to affect the final cost. But if you have parts that are going back four or five times in the course of making that vehicle, and there's a 25% tariff at each stage of that part moving across the border, then the effects get multiplied.

And so I think that we're not recognizing in these discussions, the complexity of the modern global trading system and hence the potential disruption. I talked about the tariffs of the 1920s and 1930s. The effects today could be far, far worse because of how complex and integrated the modern world trade system is.

So could they, over a significant period of time, to reorganize to make stuff in the States? Sure. But we'd be vastly poorer as a country, not to mention what we'd be doing to our neighbors. So we could, but we shouldn't. We could, but we shouldn't. Yeah. On a global scale, how does trade tie into national security?

Well, so let's start from the simplest. And I still believe this is more true than it's not. And we could go way down the rabbit hole on this. But by and large, countries that trade with each other are less likely to go to war. They have a stake in not going to war. They depend on their neighbors for

for products. So I think big picture national security trade tends to be a stabilizing force. And then you start to dig down. I mean, our national security establishment, our Pentagon relies on imports for a lot of things. I mean, we for raw materials, critical minerals, manufactured goods. We work with the Europeans and the Canadians and others on aircraft and missiles and other defense products. So so there is a whole arms trade, their whole trade in defense products that's important

to being able to have a strong, well-equipped military at a cost that's hopefully not too outrageous.

Not only do solid trade relationships help us prevent war by remaining partners, trade is also how the U.S. built up its large defense arsenal. The Pentagon works with U.S. allies to manufacture different weapons and parts. For example, the U.S. and EU have begun co-producing artillery shells, and Mitsubishi, based in Japan, manufactures parts for U.S. missile production and development.

In fact, many of the rifles and automatic weapons that the U.S. military uses are solely manufactured in Germany, Italy, and the U.K. Our defense at home turns out to be a global effort.

And then the final dimension, which gets a lot of attention, is that there are some products that are just really critical for military superiority. I mean, some of these are not that hard to control. You think of like night vision goggles. I mean, the soldiers use night vision goggles for all sorts of things. They're not actually all that available commercially. I mean, you can get them in some places, but not ISEN. So there are some technologies that are fairly narrow and easy to control. But nowadays, these...

The most important technologies for national security are the same ones that are important for commercial success, namely advanced semiconductors and all the various appendages of the modern technology system.

And so it gets very complicated to figure out how to try to keep that stuff out of the hands of adversaries while not crippling your old companies that are making these high-end products. And that's a huge issue in the relationship between the United States and China. We don't want to sell the latest, greatest semiconductors to China that you can use for AI applications or for military applications. The United States has a global lead in these. And so we try to

keep this stuff out of the hands of the Chinese. Hurts our own companies because China is a big market. It hasn't been all that effective. Anyway, China seems to be making significant progress in AI despite Western restrictions on selling them products.

This January, the U.S. was shocked by the creation of DeepSeek, a Chinese AI company that used old NVIDIA hardware to create a large language model with the same computing power as U.S. competitors, like ChatGPT's new GPT-4. In fact, the announcement of DeepSeek was such a shock that it temporarily tanked U.S. markets and led policymakers to question the effectiveness of these controls on Chinese companies.

We did the same thing during the Cold War with the Soviets. I remember back when I was just getting my start in all this stuff. Huge controversies over whether we were going to sell fiber optic cables to the Russians.

For intelligence reasons, right? It's easy to tap above ground communications, fiber optic communications underground. The U.S. intelligence services have a hard time following that stuff. So it's huge controversy over AT&T. It's like basic phone cables to the Russians in the late 80s and 90s. All that went away after the Soviet Union collapsed. But this is an old issue.

You assume everyone's kind of doing the same too, right? Like keeping all the best stuff for themselves? Well, they're trying, except the U.S. by and large, and there are exceptions here, the U.S. by and large remains the world's technological leader and the world's military leader. So it's mostly us trying to keep stuff from other countries. Well, there is an organization that's supposed to be keeping an eye on all these things. The World Trade Organization, or WTO.

The WTO was founded in 1995 as the successor organization to the General Agreement on Tariffs and Trade, better known as GATT, established in 1947. The foundation of the WTO was to regulate trade between its member countries, and as of today, there are 166 participating members of the World Trade Organization.

Since its creation, the WTO has helped resolve hundreds of trade and tariff disputes. It's lowered trade barriers and negotiated dozens of agreements. But over time, it has struggled to maintain its influence as the world's trade legislator. I think international organizations like the World Trade Organization have the same sway to keep countries in line anymore.

Next one. I wouldn't go into detail if you want, but no, the WTO has become a powerless organization. When you think feckless United Nations organization, that's what the WTO has become, which is extraordinary because for a period of time after its creation, it was unparalleled in its influence. There was a procedure to resolve commercial disputes and nations largely abided by that. That's almost unheard of in international politics. Nations don't give up their sovereignty for anything.

And they gave up sovereignty when it came to dealing with commercial disputes. And that worked reasonably well for about 20 years. But I think when the history books are written, people are going to write about the WTO the same way they write about the League of Nations in the 1920s and 30s. A wonderful, romantic idea that never really quite worked in Brampton. Stability, a sense of global community. They were the key.

The World Trade Organization was not without its shortcomings. Its member states were unable to agree on new rules, so it quickly became ineffectual at solving disputes between countries. Many policymakers accused the WTO of not holding China accountable for its unfair trade practices. And today, instead of negotiating through the World Trade Organization, many countries have opted for bilateral agreements. It would take a lot to reform the WTO.

But without a global regulatory body, the risk of multiple trade wars increases dramatically. Has Washington gotten wrong about trade or is currently getting wrong about trade? And what rules and norms do you think need to be reevaluated?

I think, unfortunately, trade got way oversold. I mean, I gave a lecture a while ago out in Nebraska where they're really worried about this because their farmers are going to get creamed by the retaliation. And the basic theme of my lecture was, let's make trade boring again. Because trade was way better when it was boring. And we've really seen this on both sides. You go back

to the debates over bringing China into the WTO. And the Clinton officials and the business lobbyists made outlandish claims about how great this was going to be for the world and great for U.S.-China relations. Of course, U.S.-China relations have mostly gotten worse since China came into the WTO. So we imagine

that trade would do a lot more than it did. We're not going to let China flood our market. There has to be a level playing field for American companies competing in China. When China joined the World Trade Organization in 2001, it was given access to new trade relationships, allowing the country to expand its export markets.

But... Joining the WTO meant China faced fewer tariffs and restrictions from its trading partners. And the result was dubbed the China shock. The 12-year surge in Chinese imports into the United States beginning in the early 2000s has come to be known as the China shock because it resulted in a quick and shocking decline in the U.S. economy, leading to the loss of over 2 million American jobs.

Since the U.S. and China established full diplomatic relations in 1979, the two sides have diverged in handling volatile disputes over regional authority and security issues. The U.S. has gone head-to-head with China over fairness in trade and investment, cyber espionage, and human rights practices within and beyond China. So as you can imagine, the China shock only furthered tensions between the two.

If you look here in the United States, for certain workers in certain places, import competition hurt them quite a bit. But in terms of our economy, it's a drop in the bucket, right? Millions and millions of jobs in this economy turn over every year. Most people don't work in traded industries. They work in service industries of one sort or another.

I mean, most people, most Americans are not working in sectors that get affected by trade. Most of the good jobs aren't in trade anymore. I mean, back in the 1960s and 70s, manufacturing was a really good job, but most manufacturing jobs actually aren't great jobs anymore. They don't pay very well. Most of them are getting replaced by robots and machinery. Even if we bring a lot of traded sectors back to the United States, it's not going to create very many jobs.

So it's just it's been outlandishly oversold. And I think Trump now is terribly overplaying his hand in terms of how much leverage he thinks the U.S. has on trade. For most countries in the world now, the United States is no longer their largest trading partner. China is. We don't have anything like the leverage we used to have. We have a lot of leverage over Canada and Mexico.

because they're small countries that are entirely dependent on us. And Trump's a bully, so he loves beating up on small countries that are entirely dependent on him. But as a tool for global influence, he's way, way overselling what we can do with trade. Takeaway four: Trade relationships with countries around the world, including our adversaries, are really important for our security.

eroding the trust of our partnerships and dismantling economic cooperation could destroy access to U.S. markets and do irreparable damage for smaller economies. And this move could provide openings for competitors like China and Russia to leverage their economies instead.

So that's my worry. I mean, I think it's, you know, honestly, I think it's ridiculous that trade's on the front page every day. It really shouldn't be. You're like, everyone leave me alone. You just want to go back to living a nice, quiet life. Quiet, yeah. And maybe that's why many of us today think trade is boring, or at least should be boring.

Because since the 1950s or so, there was a general consensus among presidents and policymakers that trade was a good thing. Historically, most of the discussion in Washington revolved around legislation and regulatory measures to make trade work better. But today, trade is frequently making the headlines in a different way.

It's being wielded as a tool to leverage influence in other foreign policy domains, to stop immigration across our southern border, tackle illegal drug trafficking, and force our allies to ease up on regulating American tech and social media companies.

Trade is no longer just about trade. There's a stark divide on what path to take going forward when it comes to trade policy. And our partners abroad are growing skeptical of how Washington will pursue a unified strategy in the years to come. That's why next time on Why It Matters, we're diving into the Washington Consensus with CFR Head of Studies Shannon O'Neill.

Current trade norms are upended. There are no norms today. The only Washington consensus I see is a suspicion in Washington as to what trade the United States should be involved in. Does a clear strategy for trade exist in Washington anymore? And what have policymakers gotten wrong? More on that in two weeks.

For resources used in this episode and more information, visit cfr.org slash whyitmatters and take a look at the show notes. If you ever have any questions or suggestions or just want to chat with us, email at whyitmatters at cfr.org or you can hit us up on X at cfr underscore org.

Wyatt Matters is a production of the Council on Foreign Relations. The opinions expressed on the show are solely that of the guests, not of CFR, which takes no institutional positions on matters of policy. This episode was produced by Molly McEnany and me, Gabrielle Sierra. Our sound designer is Marcus Zacharia. Our interns this semester are Isabella Hussar and Joe Strogatz. Robert McMahon is our managing editor. Our theme music is composed by Carrie Torhusen.

You can subscribe to the show on Apple Podcasts, Spotify, YouTube, or wherever you get your audio. For Why It Matters, this is Gabrielle Sierra signing off. See you soon.